Iran and the US: An inverted prisoner's dilemma

International banks are at risk of astronomical fines if they engage in transactions with Iran [Getty Images]

The Obama administration's shift towards diplomacy with Iran has been decisive, determined and successful. Because of it, the United States has never been this close to resolving the Iranian nuclear dispute. One sign of this is the Saudi governments invitation to the Iranian foreign minister to visit the kingdom - a step Riyadh eschewed earlier when the nuclear talks were more uncertain.

And yet, despite widespread expectations that Iran would fail to negotiate in good-faith, it now appears that complications on the US side are most likely to pose the greatest challenge to diplomacy.

At this advanced stage of the diplomatic process, both sides will be distinctly worse off if they are deemed responsible for faltering the negotiations. Iranian foul-play will further isolate Tehran and potentially create a greater sense of legitimacy for a US military option. Failure by the US to live up to its end of the bargain will severely undermine the international discipline around the sanctions regime, providing the Iranians with de facto sanctions relief without exacting any limits on Iran's nuclear programme.

Even opponents of a deal in Washington and Tehran recognise that they find themselves in an inverted Prisoner's Dilemma: Instead of being motivated to cheat on a deal so as to ward against the other side's duplicity, the optimal outcome for hawks is for the other side to cheat, get caught, and be blamed for the breakdown of the diplomatic talks. While hawks prefer no deal to a deal, the worst outcome is if they are ascribed blame for the collapse of talks.

This is precisely why the Obama administration - who wants a deal and a strong one at that - must sustain its discipline in fully implementing the interim deal. The Iranians are living up to their end of the bargain, as the IAEA confirmed once again recently.

The US is also abiding by the interim deal, but there is trouble ahead. As we have learned in these past few months, unwinding sanctions has proven far more difficult than first anticipated.

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Shell-shocked by the ambiguity of US financial sanctions combined with astronomical fines and reputational concerns, banks have fully disengaged from all financial transactions with Iran. Even when certain trade transactions are permitted, banks do not have sufficient guarantees they won't be penalised if they facilitate the transfer of funds to Tehran.

This is not a new problem. Over the years, the financial sanctions have evolved into a Frankenstein's monster that the US government appears unable to fully control. For instance, even though medicine is exempted from US sanctions, the fear of dealing with Iranian banks has helped precipitate the ongoing medicine crisis in Iran. The inclusion of a channel to enable the sale of medicine to Iran in the interim deal was a tacit acknowledgment by the US that its sanctions constituted a key factor behind the shortages.

Similarly, when the US Treasury temporarily waved sanctions to facilitate humanitarian aid to earthquake victims in Iran in 2012, banks were unimpressed. As one bank told the National Iranian American Council, the best way to help the earthquake survivors was to fill a suitcase with cash and physically take it to Iran.

Understandably, the White House worries that incrementally lifting sanctions will precipitate an uncontrolled unravelling of the sanctions regime and eliminate some of the leverage Washington aims to use during the final phase of the negotiations.

But precisely because of the inverted Prisoner's Dilemma in which the US and Iran find themselves, Washington must also worry about the opposite extreme: That blame for the failure of the deal falls at the feet of the US due to obstacles created by sanctions. Banks' reluctance to resume transactions with Iran also foreshadows a problem that will emerge if Washington only offers time-limited sanctions waivers as part of a final accord. Only the complete lifting of sanctions, which would require an affirmative act of Congress, will induce Iran to make the necessary nuclear concessions since banks are likely to remain risk-averse, so long as sanctions remain on the books and plausibly threatened.

Both the White House and Congress have a role to play in both safeguarding the ongoing negotiations and protecting the US position should the talks fail. First, the White House must swiftly instruct the US Treasury to provide banks with the necessary written guarantees that they will not be penalised - now or in the future - for handling permitted financial transfers to Iran in line with the interim agreement. Whatever guarantees have been provided thus far have been insufficient.

Second, Congress must prepare legislation that provides the president with the authorities he needs to lift sanctions on the schedule that a final deal will outline and only for so long as Iran complies with its reciprocal obligations. Given the power to provide the desired sanctions relief, the president can secure stronger and more sustainable nuclear concessions from Iran.

Having come so close to a final nuclear deal that prevents both war with Iran and an Iranian bomb, the president must now ensure that sanctions do not scuttle it - or else the US will be deemed the problem.